By David Frank, Chief Analyst, AvaFX
The dollar’s this past week was very volatile. However, that did not translate into consistent direction. Looking at the fundamentals, the lack of direction one way or the other is fitting. Why? The economic docket was exceptionally light. However, we have come to learn that the data and headlines from the US do not always guide the USD. It is the overall health of the global financial markets. We will see the market continue to decide and think over the balance of risk trends as well as market stability. These are against the backdrop of headlines which end up threatening both.
This coming week, and next, might be interesting. First, dollar traders will need to keep an eye on underlying market sentiment. Having a good grasp on risk appetite is important. However, the potential for any form of a trend from the Dollar resides within the momentum behind these shifts in optimism. The best way to measure this so called notion of risk trends and its impact on the USD is to monitor two things:
1. the performance of the S&P 500
2. The strength of correlations between different asset classes
As usual, the S&P 500 index is the favored barometer for investor sentiment. Why? This is the most recognizable and liquid equity index in the world’s largest economy. This makes it a perfect gauge for global sentiment. Also, equities have an inherent bullish bias. Why? The vast majority of market participants buy and then hold. Following that logic, when confidence rises, equity shares are purchased. When fear or the markets are shaken, they are sold. In correlations, we see how critical funding availability, expected rates of return, economic growth, stimulus and other market manipulations take over the broad flow of capital.
Over the coming weeks, the exceptional volatility we are seeing as well as the growing appreciation for global stability threats will maintain correlation and keep speculative interests in favor of headlines and especially those which might provide a surprise.
If we look at a big picture view of the world markets, the general trend might be towards a greater sensitivity to risk aversion. With the IMF now warning that the world could reenter a recession, yields are easing on a global scale. We are seeing more regulations requiring banks to carry more capital on hand and stimulus running into ceilings. It could be that conditions might be ripe for a follow up to the 2008 crisis.
This might increase investor response to negative headlines while possibly dampening the positive ones. However, it would seem that positive updates are more likely. Relief for immediate crises is something Forex, commodity and equity traders have grown familiar with. This is due to the long standing efforts by US and European officials to try to get a grip on the ongoing debt problems. With Italy and Greece stepping back from the ledge this past week, the most likely villains for a credit crunch have been delayed. Unless we see something new pop up in the headlines that reflect an emerging market bubble crisis the market may be happy for now.
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DISCLOSURE & DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY AND NOT TO BE CONSTRUED AS SPECIFIC TRADING ADVICE. RESPONSIBILITY FOR TRADE DECISIONS IS SOLELY WITH THE READER. FOR MORE INFORMATION AS WELL AS UP TO DATE FOREX ANALYSIS VISIT Fx-Insights: Daily forex news.
